On 28 November 2022, the Council gave its green light to the Regulation on foreign subsidies distorting the internal market (Regulation). At present, EU companies do not necessarily compete on an equal footing with non-EU companies. Whereas funding by Member States is subject to rigorous scrutiny under the EU State aid regime, subsidies given by third countries frequently escape close examination. Moreover, the EU’s rules on merger controls, public procurement, foreign direct investment (FDI) and trade defence do not provide a specific remedy against market distortions caused by foreign subsidies.

New tools against disruptive foreign subsidies

The Regulation adds new powers to the Commission’s toolbox to ensure a level playing field in the internal market for companies that receive foreign subsidies and those that do not. It enables the Commission to investigate on its own initiative (ex-officio) subsidies granted by non EU public authorities to companies operating in the EU. If it finds that subsidies are distortive, the Commission can apply measures to avoid companies from taking advantage of, for instance, zero-interest loans, below-cost financing, preferential tax treatment or direct state grants, so that they do not outbid EU competitors in mergers, acquisitions or public procurement procedures.

According to the new rules, companies will need to notify the Commission about planned mergers and acquisitions if one of the parties involved generates an aggregate turnover in the EU of at least €500 million and there is a foreign financial contribution of at least €50 million. As regards public procurement procedures, notification is required if the value of the procurement is equal to or greater than €250 million. Economic operators will need to notify the contracting authority first, which will then send the notification on to the Commission.

Implications for M&A and Public Procurement

Mergers and acquisitions already often face scrutiny globally, under several regulatory regimes. On top of parallel merger control and FDI screening procedures in (often) several jurisdictions, parties will need to account for another layer of scrutiny. Even though it is obvious that China is the main target of the Regulation, in practice, it will affect any subsidized company from a third country. To increase deal certainty, significant experience in dealing with parallel reviews and familiarity with state aid rules will be key. Foreign investors will need to allocate more time and attention to identify any applicable regulatory pre-closing requirements. Otherwise, in the worst case, they run the risk of the competent authority unwinding the transaction. From the seller’s perspective, pre-evaluating the risks related to non-EU investors will be even more important.

As regards public procurement procedures, the effects of the new Regulation will not necessarily be limited to private bidders. Apart from the budgetary implications, the new instrument has the potential to slow down public procurement procedures and awards of contracts – hence, the delivery of government projects. This applies all the more, since the notification obligation applies to large-volume procurement projects, which are already complex. Public procurement is crucial for delivering public services at a consistently high level during the twin green and digital transitions. Even though national contracting authorities may “only” have a role as regards receiving and transmitting notifications, the additional workload will fall on them as well. There-fore, they will have to build expertise and take even more care when preparing and designing the procurement process. Otherwise, they risk being left without a competitive bid at the end of the day.

Next steps

The Regulation will enter into force 20 days after its publication in the Official Journal, which means it will be applicable by mid-2023 (i.e., six months after entry into force). Prior notification obligations will become effective three months later.

While the objective of the Regulation is straightforward, only predictable rules will create the level playing field required for investment and fair competition. At certain junctures, the Regulation warrants further clarification. With that in mind, it is most welcome that the Commission is obliged to issue guidelines on how it will assess the distortive nature of foreign subsidies and a subsidy’s market distorting effect against its potential benefits. In addition, companies can consult the Commission to verify whether they need to disclose the subsidies received.